Secrets to Success, 3 Must-Have Financial Calculations

Tracking customers in today’s online environment require many web-based companies that engage in targeted campaigns to keep track of consumers as they move from interested leads to long-lasting loyal customers. It is important to keep an eye on the bottom line financial metrics to ensure you’re getting the best return for your marketing dollars.

Here are 3 must-do calculations for a successful business model

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Customer Acquisition Cost | This is the yardstick which measures how efficient your marketing is.

The Cost of Acquiring a new Customer (CAC) is calculated by dividing all the costs spent on getting more customers (Marketing expenses) by the number of customers gained in the period the money was spent.

For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their customer acquisition cost is $1.00. Source: neilpatel.com

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Lifetime Value of a Customer | This measures the relationship between the lifetime value of a customer and the cost of acquiring that customer.

When determining the lifetime value (LTV) of a customer, the best way to understand the concept is to think of it in terms of the value a customer contributes to your business over their entire lifetime at your company.

Calculate average purchase value: Calculate this number by dividing your company’s total revenue in a time period (usually one year) by the number of purchases over the course of that same time period.

Calculate the average purchase frequency rate: Calculate this number by dividing the number of purchases over the course of the time period by the number of unique customers who made purchases during that time period.

Calculate customer value: Calculate this number by multiplying the average purchase value by the average purchase frequency rate.

Calculate average customer lifespan: Calculate this number by averaging out the number of years a customer continues purchasing from your company.

Then, calculate LTV by multiplying customer value by the average customer lifespan. This will give you an estimate of how much revenue you can reasonably expect an average customer to generate for your company over the course of their relationship with you. Source: blog.hubstop.com

Gross Profit Margin | This is an important financial metric used to measure a company’s financial health and business model by revealing the amount of money left over from revenues after accounting for the cost of goods sold.

The gross profit margin (GPM) is calculated by subtracting the cost of goods sold (COGS) from the total revenue.

The top number in the equation, known as gross profit or gross margin, is the total revenue minus the direct costs of producing that good or service. Source: Investinganswers.com